New Baltic Rim Outlook released: is this 1997–1998 all over again?

However, the potential is not exhausted yet and there still is room for substantial growth. – The Baltic countries and Poland will become tomorrow's economic hub in Western Europe. We do not need to go as far as Asia to talk about tiger economies – they're on our doorstep, says Senior Analyst Mika Erkkilä, Nordea’s expert in the Baltic countries and Poland.

Estonia’s economic growth will slow down to 9.5% in 2007 from this year’s 12% rate. Tightening measures work, as lending growth seems to have peaked. Real estate prices are also stabilising. Inflation will remain relatively high, implying that EMU is not realistic before 2009–2010.

There are some initial signs in Latvia that a moderation in the double-digit growth rates may be underway. If growth slows down as expected, this will probably lead to a soft landing in the real estate market as well. The risk is still that growth will continue at current overheated rates. A tight labour market will continue to push wages up and consequently maintain inflationary pressures.

Lithuania is displaying some signs of overheating, but a large-scale loss of competitiveness has not taken place, despite a growth rate of 8%. In addition, real estate prices have been stabilising. This makes a soft landing the most probable outcome. The authorities will probably aim at EMU again, this time with a view to joining in 2010. The outcome is again uncertain.

Both Polish households and corporates are in a good shape. Increasing reliance on domestic demand will make the economy more resilient towards the expected global slowdown next year. Inflation is accelerating amid rising wage pressures and will prompt a first rate hike. Politics is the joker.

The Baltic countries’ EMU membership has been delayed and it is uncertain when they will try again. The governments cannot delay the membership indefinitely, as there are also risks attached to this. If they want to join in the not-too-distant future, it requires swift decision-making now, Mika Erkkilä points out.